Exercising
its power under various provisions of the SEBI Act, 1992 the Securities
Exchange Board has come up with SEBI (Prohibition of Insider Trading)
Regulations, 2015. These regulations will come into force on 120th
day of publication in the official Gazette.
This post aims to analyze these regulations from
the perspective of amendments to the existing regulations and the novel
concepts introduced under the new regulations.
Following
are the major changes which are aimed by the new Regulations in regulating the
Insider Trading framework in India:
v Applicability
of the Regulations
Under
regulation 3(1) of the 2015 regulations the charge of insider trading has been extended
to securities listed and proposed to be listed on stock exchanges. This is
an expansion from the 1992 Regulations where-under the same regulation was
applicable only with respect to companies that were listed. The probable reason
for such a change is to bring within its purview those securities which will be
amenable to price discovery through market interplay.[1]
v Notes
to interpretation
Every
provision under the 2015 Regulations is accompanied with specific notes setting
out the legislative intent for which that provision has been formulated. This
reflects the substance over form approach, these notes will aid in capturing
the spirit of the legislation and how the regulatory is likely to look at its
enforcement.
v Definitional
Changes
1. Under the new regulations the definition of ‘Insider’ has been simplified to mean a
person who is a connected person and those in possession of ‘Unpublished price
sensitive Information’.[2]
2. The definition of ‘Connected person’ has now been given a broader meaning even
including the public servants and holders of statutory offices who are can be
reasonably expected to have access to UPSI. The immediate relatives of the
connected persons are also considered as connected persons unless they can
prove that they didn’t have access to the UPSI.[3]
3. Under regulation 2(n) of the 2015 Regulations,
the criteria for what constitutes ‘unpublished price sensitive information’ would
be whether the information is ‘generally available’ or not.
4. Under
2(n) of 2015 only the definition of ‘unpublished price sensitive information’
has been extended to both a company and securities whereas it was
limited to only companies in the previous regulations.
v Rebuttable
Presumption
It is
clarified that the presumption against persons deemed to be ‘connected’ is
rebuttable under the Regulation 4(2). This provision is akin to the
presumption that exists against various persons having a common objective or
purpose of acquisition i.e. persons acting in concert under the SEBI
(Substantial Acquisition of Shares and Takeover) Regulations, 2011.
v Prohibition
on Insider Trading
Under
the 2015 regulations multiple restrictions have been placed i.e.
(i) Prohibition on communication of unpublished
price sensitive information[4];
(ii) Procurement
of unpublished price sensitive information,[5]
and
(iii) Trading
in securities when in possession of unpublished price sensitive information.[6]
It has
to be noted that the 1992 Regulations prohibited ‘dealing’ in securities
when in possession of unpublished price sensitive information, amongst others;
the expression ‘dealing’ has been replaced with ‘trading’ in securities in 2015
. Under the new Regulations, the definition of ‘trading’ has been kept wide
to curb activities which are not strictly buying, selling or subscribing such
as a pledging etc.
v Exclusions
The 2015
Regulations provide for certain exclusions where the charge of insider
trading will not get attracted, namely:-
Ø In the conduct of due diligences:
Communication and procurement of information in connection with transactions
involving PIPE, mergers and acquisitions, subject to certain conditions;[7]
Ø For off-market transactions between promoters
who are in possession of the same information, and are making a conscious and
informed decision;[8]
Ø In case of non-individual insiders:--
The individuals who were in possession of
such unpublished price sensitive information were different from the
individuals taking trading decisions and such decision-making individuals were
not in possession of such unpublished price sensitive information when they
took the decision to trade;[9]
Ø When the trade was executed in the absence of
any leakage of information, thereby recognising the concept of ‘chinese walls’
in large organisations;
Ø When trades executed in pursuance of trading
plans.
v Disclosure
Obligations
The
disclosure obligations under the Regulations have been limited to ‘insiders’
and are as follows:
Initial
disclosures of trades to be made by only the promoters, key managerial
personnel, directors internally;[10]
Continual
disclosures to be made by every promoter, employee or director in case value of
trade exceed monetary threshold of ten lakh rupees over a calendar quarter;
company to accordingly notify stock exchanges within 2 trading days;[11]
Earlier
disclosure requirement for persons holding more than 5% shares or voting rights
or in case of any further change in their shareholding or voting rights has
been done away with.
The
disclosures of trading in securities shall also include trading in derivatives
of securities if permitted under law (to be noted that section 194 of the
Companies Act, 2013 prohibits Director or KMP from entering into forward
dealings etc.)
v Trading
Plans
It is a
novel concept to India, provisions on ‘trading plans’ have been introduced
whereby every insider is entitled to execute trades in pursuance of
pre-determined trading plan in accordance with the Regulations.[12]
v What
is Trading plan
It is
basically introduced with the aim to have transparent frame for trading in
securities by those insiders who are having unpublished price sensitive
information through the year. The insider would be required to submit trading
plan in advance to the compliance officer for his approval. The compliance
officer is also empowered to take additional undertakings from the insiders for
approval of the trading plan. It shall be submitted for a minimum period of 12
months. Trading can only commence only after 6 months from public disclosure of
plan. Compliance officer will approve
the plan. The trading plan once approved shall be irrevocable and the insider
shall mandatorily have to implement the plan, without being entitled to either
deviate from it or to execute any trade in the securities outside the scope of
the trading plan.(Except in few case like where insider is in possession of
price sensitive information at the time of formulation of the plan and such
information has not become generally available at the time of the commencement
of implementation)
v Compliance
Officer
Qualification
criteria have been set for a compliance officer who shall report to the board
of directors of the company or the head of the organization, as the case may
be.
The
compliance officer’s role in monitoring and approving a trading plan has
been made important. Enhanced role for the compliance officer who would
need to police, monitor and regulate trading by employees and connected
persons. Regulation 5(3)
v Penalties
No
separate penalties have been prescribed under the Regulations. Reference is
made however to the penalty provisions under the SEBI Act, 1992 which shall
apply. As per the Act, insider trading is publishable with a penalty of INR
250,000,000 (Rupees Two Hundred Fifty Million Only) or 3 times the profit made
out of insider trading, whichever is higher.
v ANALYSIS
Ø While some of the Regulations have been
enacted at par with the international practices to bring more clarity (substance
over form approach), some of the Regulations are more onerous and testing
for the corporate to implement at initial stage.
Ø The
Regulations are precisely more clear in some aspects say as on what to be
construed as price sensitive information by defining specifically “generally
available information” separately.
Ø The landmark deviation in new Regulations in
context to the 1992 regulation is right of defense by the insider to rebut the
charges of insider trading.
Ø The Regulations though establish all together
a new set of governance by legislating these Regulations in all-inclusive way
covering disclosures of trading by KMP/Directors/promoters as well as employees
on crossing the threshold of Rs. 10 lakh in value. Regulation 7(2)(a).
Ø On the
other hand, some Regulations have been left for open ended for discussion
requiring clarity such as whether the stock options granted to employees can be
exercised by employee during closure of trading window.
Ø Another ambiguity in the Regulations relates
to the requirement of disclosure of trades in securities by directors,
promoters as well as employees on crossing the threshold of Rs. 10 lakhs in
value, which seems to be too much arduous for the companies. It would have been
more rational to have the requirement of continual disclosure limited to
KMP/directors/promoters on threshold at higher value say Rs. 15 or 20 lakh.
Ø At the same time it has to be kept in mind
that these regulations have not been enforced as of now and will only come into
force on the 120th day of its publication in the Gazette which suggests
there is still time to correct the ambiguities before it finally comes into
force.
[1] Insider
Trading Norms Revisited: An Analysis of the N.K. Sodhi Committee Report,
Nishith Desai Associates.
[2] Regulation
2(g), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[3] Regulation
2(d), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[4] Regulation
3(1), SEBI ( Prohibition of Insider Trading) Regulations, 2015.
[5] Regulation
3(2), SEBI ( Prohibition of Insider Trading) Regulations, 2015.
[6] Regulation
4, SEBI ( Prohibition of Insider Trading) Regulations, 2015.
[7] Regulation
3(3) (i), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[8] Regulation
4(1) (i), SEBI ( Prohibition of Insider Trading) Regulations, 2015.
[9]
Regulation 4(2) (a), SEBI ( Prohibition of Insider Trading) Regulations, 2015
[10] Regulation
7(1) (a), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[11] Regulation
7(2) (a), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[12] Regulation
5(1), SEBI (Prohibition of Insider Trading) Regulations, 2015.
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